Conservatives will vote in a secret ballot tonight on whether they wish May to remain leader or whether she should stand down, after she postponed a parliamentary vote on her widely unpopular Brexit deal.
The vote of no confidence has been rumoured since last month, and letters have been sent to the influential backbench 1922 Committee since the summer, but matters are finally now coming to a head.
May warned that a vote on her leadership could mean Brexit is delayed or even doesnt happen in the event that she loses.
Sterling rose off a 20-year low of 1.249 against the dollar to 1.253 this morning after justice minister David Gauke said that Brexit would need to be delayed if May is forced out of power.
The FTSE 100 rose 1.06 per cent this morning on the news, as well as on signs that the US and China's trade war is easing up.
Standard Life Aberdeen led the risers with a 3.4 per cent share price gain.
Wood Group led fallers with a seven per cent drop, while Sainsburys followed closely with an almost five per cent decline after it asked for more time to respond to the competition watchdogs probe into its Asda merger.
Meanwhile, one analyst warned the FTSE faces “a rocky day” as the no confidence vote approaches.
“Whether Mrs May wins or loses the vote the turmoil is unlikely to stop there because Labour and the Scottish Nationalists are getting ready to challenge the government and ask for a new election,” Fiona Cincotta, senior market analyst at City Index, added.
“The outcome of that could be more radical – either a no-deal Brexit because the time will run out for a deal – or a potential full U-turn including a new referendum.”
XTB chief market analyst David Cheetham warned that if May is toppled, the alternatives are far worse for markets given letters for her removal were led by hard Brexiters.
“If May is ousted she will almost certainly be replaced by someone who will push for a harder Brexit and this would further alienate Remainers within the party,” he said.
“Secondly, replacing Prime Minister May would increase the chances of a vote of no confidence in the government, opening the door for a possible general election and the prospect of Labour leader Jeremy Corbyn as the next Prime Minister.
“If the first of these scenarios could be described as undesirable, the second would be vehemently opposed by the Tories and as such they may think very carefully before voting against the PM this evening.”
Laith Khalaf, senior analyst at Hargreaves Lansdown, added that Brexit fatigue has a part to play in the markets' "muted" reaction to the latest development.
“Political turmoil is largely priced in," he added. "While Brexit is clearly a big issue for the stock market, there are other issues at play too, and signs of appeasement in US-China trade relations are serving to underpin sentiment across international markets.
"Indeed, this morning, the share prices of companies the market has pinned to the Brexit mast have unexpectedly risen, including names like Lloyds and RBS – although they are still in the red across the last week as a whole.
"Trying to forecast market movements based on the outcome of unpredictable political events is a bit like trying to play darts while riding a unicycle. Investors are therefore better served by maintaining balance in their portfolio in times of great uncertainty like these.”